By Jose Aponte-Hernandez
State Representative in Puerto Rico and Former Speaker of the House
September 02, 2016,Most of the dispositions of the Puerto Rico Oversight Management and Economic Stability Act, known as ‘PROMESA’ by its acronym, are set to become the ‘Law of the Land’ in this U.S. Territory during the next few days, and although there is vast array of arguments regarding this matter, the reality is that PROMESA is here to stay.
With PROMESA comes a Task Force that will have, among its many duties, the oversight of the development, by the local government, of a viable, tactical and strategic economic plan that could jump start our economy, which have been in recession, the longest in the history of the U.S., since the third quarter of 2004. We did have a slight improvement between 2010 and 2012, but it wasn’t sustained the following year
While the Task Force is yet to be constituted, some members of the Joint Congressional Finance Committee have been shopping the idea of stabilizing some kind of tax shelter for companies doing business in the Island. In essence, they are pushing to bring back from the dead Section 936 of the U.S. Tax Code.
Known to most people as the Possession Tax Credit, Section 936 was a provision in the U.S. Tax Code enacted in 1976 with the goal of encouraging business investment in Puerto Rico, as well as in other U.S. possessions and territories. In 1996 Congress voted to phase out Section 936, arguing that the excessive cost, the small number of companies that applied for it and the even smaller return, in terms of job creation, did not justify it. Section 936 failed to achieve its stated goals mainly because the few companies that used this tax shelter were not ‘invested’ in Puerto Rico as proportionally as they should have been.
Even while Section 936 reduced corporations' tax bills, in 1991 alone those companies received a massive $2.8 billion tax break, the American citizens in Puerto Rico did not see a proportional benefit. The numbers do not lie. Despite some smallish economic growth, the per capita income on the Island ($6,000 in 1991) remained less than 30 percent of the average in the U.S. At the same time, local unemployment rates (averaging 16 percent) were more than double that of the mainland. As the firms located on the island enjoyed large profits and low tax bills, the situation on the ground, for our people, did not improve.
As early as 1993, the GAO was raising the "Red Flag" regarding the real and tangible benefits of Section 936 in Puerto Rico. In a report issued that same year, this important and well regarded branch of the Congress concluded that companies that applied for tax credits under Section 936 were making an average of $69,800 per employee, while the worker wages averaged less than $22,800. This is a huge discrepancy.
More to the point. Job creation in 936 companies during its 30 year span was 45 percent less than that of other territories with similar tax breaks. Simply put it, Section 936 did not create jobs or improve the quality of wages. That’s the reality.
Despite Section 936’s well known shortcomings, a small group of congressmen, backed by high stake corporate lobbyists, are suggesting bringing back some type of Section 936, arguing that it is essential for job creation in Puerto Rico.
As stated before, and corroborated by real time data, Section 936 companies only serve themselves. They do not create jobs, improve wages or promote economic growth. Puerto Rico does not need to go back to the past to shape its economic future, even less so with a model that has not worked.
I urge the members of the PROMESA Task Force to look for innovating mechanisms to stimulate our economy. Financial and tax platforms that tie tax credits directly to job creation and higher wages for unskilled, as well as skilled, workers. We do not need to Section 936 back. We need solutions.
Jose Aponte-Hernandez is a state representative in Puerto Rico and is the former Speaker of the House for the territory.